VTB Weighs Saudi Equity as Morgan Stanley Shifts From Dubai

Employees sit in front of a VTB Capital Plc logo at the company's headquarters in Moscow. Both Credit Suisse and Morgan Stanley are relocating from Dubai, while VTB is remaining in the city for its Saudi Arabia coverage. Photographer: Andrey Rudakov/Bloomberg

Jan. 17 (Bloomberg) -- VTB Capital Plc, the investment
banking unit of Russia’s second-largest lender, is considering
an equities business in Saudi Arabia after starting a program
that allows foreign investors to buy the nation’s shares.

“We may look at setting up in Saudi,” Makram Abboud,
Chief Executive Officer for the investment bank in the Middle
East and Africa, said in an interview in Dubai on Jan. 15. “We
re-evaluate our position every six months. We’ll see how this
program goes. We strongly believe in the Saudi market.”

The bank opened its so-called dollar-denominated
participatory notes program last week, a mechanism that allows
foreigners to invest in Saudi shares while circumventing
restrictions on direct investments. Average daily trading volume
for the country’s benchmark stock index gained 74 percent last
year, while Dubai’s was about half the volume it traded in 2008.

Banks such as Morgan Stanley and Credit Suisse AG are
shifting regional equities teams to Riyadh from Dubai as Saudi
volumes surge. Morgan Stanley is cutting three equities
positions in Dubai as part of the shift, according to a banker
familiar with the matter, while Zurich-based Credit Suisse is
cutting three Dubai positions and transferring another to
Riyadh, a person familiar with the matter said last month.

Biggest Oil Exporter

Saudi Arabia, the world’s biggest oil exporter, is
embarking on about $500 billion in government spending and
projects including the world’s tallest tower in Jeddah. Both
Credit Suisse and Morgan Stanley are relocating from Dubai,
while VTB is remaining in the city for its Saudi coverage.

The nation’s $727 billion economy grew 6.8 percent in 2012,
including expansion of 7.2 percent for non-oil industries, the
Finance Ministry said in December. That beat the 5.6 percent
median estimate of 16 analysts compiled by Bloomberg. The Saudi
market is closed today for the weekend.

“Every other regional market is relatively small in terms
of liquidity compared to Saudi,” Abboud said. “Foreign
institutional trading averages less than 2 percent which is
relatively low,” he said.

‘Value Story’

Saudi Arabian stocks are the “value story” across
emerging markets this year, VTB Capital analysts Digvijay Singh
and Alexey Zabotkin wrote in a note to investors on Dec. 27,
with an overweight recommendation on the kingdom. Oil prices and
strong dividend yields will help Saudi stocks, they said.

The Saudi benchmark Tadawul All Share Index has gained 3.5
percent so far this month, outpacing an advance of 1.5 percent
for the MSCI Emerging Markets Index as of yesterday’s close. The
measure offers a dividend yield of 3.5 percent compared with 2.7
percent for emerging market stocks. Shares valued at about 7.6
billion riyals ($2 billion) were traded on average in Saudi
Arabia last year, data compiled by Bloomberg show. That compares
with $52.5 million traded in Dubai and $61.3 million in Qatar.

The kingdom allowed citizens of neighboring Gulf countries
to buy and sell shares freely in 2007. Non-resident foreigners
are permitted to trade through share-swap transactions and
exchange-traded funds. The first ETF was approved in March 2010.

Fueled Speculation

Saudi Arabia’s decision to allow foreign companies to list
securities on the bourse about a year ago fueled speculation it
may ease restrictions on foreigners. The kingdom will only open
the market to international investors gradually and after
concluding there will be no negative impact on trading, the
official Saudi Press Agency reported in April, citing Capital
Market Authority Chairman Abdulrahman al-Tuwaijri.

VTB Capital also plans a targeted expansion in the Middle
East and Africa region as other international lenders retreat.

“We’re looking to expand in areas where other banks have
scaled back too much,” Abboud said. The bank provides advisory,
fixed-income trading and structured lending and asset management
services throughout the Middle East and Africa, Abboud said.
There is also growing demand for access into Russia, he said.